Property rights threatened

The federal ruling against BHP Billiton would appear to now open it to an attack on it’s basic property rights. As such it is a disturbing development. Not just for BHP shareholders but for everybody that builds assets in Australia.

“BHP Billiton has been stunned by a court decision that has found that the multibillion-dollar railway it built has to be shared with other mining companies.The Federal Court found that BHP’s railway lines in Western Australia are not technically part of its production processes.

The ruling means a separate inquiry by the Australian Competition Tribunal has a good chance of succeeding in opening critical export assets to competition.

And the world’s third biggest iron ore producer is warning its exports could be hit hard.“

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10 thoughts on “Property rights threatened”

I have read background on this case but not the judgement. It sounds like a variation of the risk Telstra’s Phil Burgess keeps talking about – being compelled to share its infrastructure with competitors at uneconomic prices.

I am not condoning being forced to share anything with competitors, but is BHP able to set ts own price for use of the railway?

I don’t know the detailed answer to your question. I suspect that more will emerge with the ongoing development of this case. However I do agree that it is essentially the same as the situation that Telstra is in.

The whole foundation of trade practices law in Australia is absurd. If there was a proposed merger or takeover where this line would be shared and the outcome would be more efficient, it is highly like that it would be rejected by the ACCC or perhaps the FIRB.

1. Does the railway line have natural monopoly or similar characteristics (the existence of substantial economies of scale or scope)?
2. Would appropriate regulation result in sufficient benefits from increased competition in a related market to offset the costs of regulation?
3. Are the access prices that prevail following regulation appropriate?

It is also worth noting that the access provisions of the TPA have been around for about a decade now.

The question is what is the relevant concept of market for the situation under consideration. If you want to move mineral ores from A to B, the market for transport is clearly not the relevant market. The market for transport includes passenger flights between C and D on the other side of the continent. Clearly resource misallocations that might occur due to natural monopoly problems in some particular commodity do not simply disappear if someone chooses to focus on the market for some broadly defined product, say “aggregate consumption”.

Presumably the market for certain mineral ore is the related market in which competition would need to be increased if the railway line is to be declared an essential facility. (It would need to be increased in at least one related market. The dimensions of that particular market would need to be defined. I do not know whether or not providing access to the railway line would increase competition in a related market in this case. Access decisions need to be made on a case by case basis. However, situations can arrive in which providing access to infrastructure with characteristics similar to a natural monopoly (pervasive economies of scale or scope) can prevent resource misallocations.

Given that the rail lines in question are used primarily for the transport of iron ore, and given the global nature of such commodity markets, I doubt this ruling will ever serve the interests of Australian consumers in any significant way. In other words I doubt the decision would significantly reduce the world iron price. What it will do is give pause to investors in private infastructure that opens up new mining frontiers. I find the benfits of such interference with private property rights very hard to see and much less obvious than the negative consequences.

As I said, I don’t know the specifics of this case. However, if it is in the courts, there has presumably been some work done by either the ACCC or the NCC on this issue.

Arguments about deterring investment are not as clear as people might think. The problem is that you don’t observe the counterfactual. The mere fact that someone claims they were deterred from investing because of access provisions does not mean that they would have actually invested if the access provisions were not present. If the access price is set correctly, it shoul;d allow a reasonable return on the investment in any event. Of course, setting appropriate access prices is not easy. Furthermore, in some cases, access regimes may actually encourage investment in the related market.

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